Consider how IT has changed how your job was performed. Digital innovation happens quickly so feel free to choose any time span that you are comfortable with to answer thi

Managing and Using Information Systems

A STRATEGIC APPROACH

SEVEN TH ED I TIO N

Keri E. Pearlson MIT Sloan School of Management and KP Partners

Carol S. Saunders Muma College of Business University of South Florida

Dennis F. Galletta Katz Graduate School of Business University of Pittsburgh, Pittsburgh, PA

VICE PRESIDENT & DIRECTOR Michael McDonald EXECUTIVE EDITOR Lise Johnson EDITORIAL MANAGER Judy Howarth CONTENT MANAGEMENT DIRECTOR Lisa Wojcik CONTENT MANAGER Nichole Urban SENIOR CONTENT SPECIALIST Nicole Repasky PRODUCTION EDITOR Vinolia Benedict Fernando

This book was set in 10/12 TimesLTStd-Roman by SPi Global and printed and bound by Quad Graphics.

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To Hana

To Rusty, Russell, Janel & Kristin

To Carole, Christy and Matt, Lauren and Jacob, Gracie, Matthew, and Claire

v

Preface

Information technology and business are becoming inextricably interwoven. I don’t think anybody can talk mean- ingfully about one without the talking about the other.

Bill Gates Microsoft1

I’m not hiring MBA students for the technology you learn while in school, but for your ability to learn about, use and subsequently manage new technologies when you get out.

IT Executive Federal Express2

Give me a fish and I eat for a day; teach me to fish and I eat for a lifetime. Proverb

Managers do not have the luxury of abdicating participation in decisions regarding information systems (IS). Managers who choose to do so risk limiting their future business options. IS are at the heart of virtu- ally every business interaction, process, and decision, especially when the vast penetration of the web over the last 25 years is considered. Mobile and social technologies, the Internet of Things, cloud computing, big data, and business analytics have brought IS to an entirely new level within firms and between individ- uals in their personal lives. Managers who let someone else make decisions about their IS are abdicating responsibilities that concern the very foundation of their business. This is a textbook about managing and using information written for current and future managers as a way to introduce the broader implications of the impact of IS.

This is the 20th anniversary of the first edition of this book. Information systems and technologies have changed significantly since the first edition, but the principles for managing and using information systems have, remarkably, stayed relatively constant. As with that initial book, the goal of this book continues to be assisting managers in becoming knowledgeable participants in IS decisions. Becoming a knowledge- able participant means learning the basics about information systems and feeling comfortable enough with information technology to ask questions. It does not mean having all the answers or having a deep understanding of all the technologies out in the world today. No text will provide managers everything they need to know to make important IS decisions. Some texts instruct on the basic technical background of IS. Others discuss applications and their life cycles. Some take a comprehensive view of the manage- ment information systems (MIS) field and offer readers snapshots of current systems along with chapters describing how those technologies are designed, used, and integrated into business life.

This book takes a different approach. It is intended to provide the reader a foundation of basic concepts relevant to using and managing information. This text is not intended to provide a comprehensive treat- ment on any one aspect of MIS, for certainly each aspect is itself a topic of many books. This text is not intended to provide readers enough technological knowledge to make them MIS experts. It is not intended to be a source of discussion of any particular technology. This text is written to help managers begin to form a point of view of how IS will help or hinder their organizations and create opportunities for them.

The idea for this text grew out of discussions with colleagues in the MIS area. Many instructors use a series of case studies, trade and popular press readings, and websites to teach their MIS courses. Oth- ers simply rely on one of the classic texts, which include dozens of pages of diagrams, frameworks, and technologies. The initial idea for this text emerged from a core MIS course taught at the business school at the University of Texas at Austin in 1999. That course was considered an “appetizer” course—a brief introduction into the world of MIS for MBA students. The course had two main topics: using information

1 Bill Gates, Business @ the Speed of Thought (New York: Warner Books, Inc. 1999). 2 Private conversation with one of the authors.

vi Preface

and managing information. At the time, there was no text like this one; hence, students had to purchase thick reading packets made up of articles and case studies to provide them the basic concepts. The course was structured to provide general MBA students enough knowledge of the MIS field so that they could recognize opportunities to use the rapidly changing technologies available to them. The course was an appetizer to the menu of specialty courses, each of which went much more deeply into the various top- ics. But completion of the appetizer course meant that students were able to feel comfortable listening to, contributing to, and ultimately participating in IS decisions. Those needs still exist.

Today, many students are digital natives—people who have grown up using information technologies (IT) all of their lives. They have never lived in a world without IT. Many have never had to function without a smartphone, and hence have instant access to information, in their pocket. That means that students come to their courses with significantly more knowledge about things such as tablets, apps, personal comput- ers, smartphones, texting, the web, social networking, file downloading, online purchasing, and social media than their counterparts in school just a few years ago. This is a significant trend and it will continue; students will be increasingly knowledgeable about the personal use of technologies. That knowledge has begun to change the corporate environment. Today’s digital natives expect to find at least the functionality they have at home everywhere they go, but especially in their work locations. At the same time, these users expect to be able to work in ways that take advantage of the technologies they have grown to depend on for social interaction, collaboration, and innovation. We believe that a basic foundation is still needed for managing and using IS, but we understand that the assumptions and knowledge base of today’s students is significantly different than previous generations.

Also different today is the vast amount of information amassed by firms, sometimes called the “big data” problem. Organizations have figured out that there is an enormous amount of data around their processes, their interactions with customers, their products, and their suppliers. These organizations also recognize that with the increase in communities and social interactions on the web, there is additional pressure to collect and analyze vast amounts of unstructured information contained in these conversations to identify trends, needs, and projections. We believe that today’s managers face an increasing amount of pressure to understand what is being said by those inside and outside their corporations and to join those conversations reasonably and responsibly. That is significantly different from just a few years ago.

This book includes an introduction, 13 chapters of text and mini cases, and a set of case studies, supple- mental readings, and teaching support on a community hub at http://pearlsonandsaunders.com. The Hub provides faculty members who adopt the text additional resources organized by chapter, including recent news items with teaching suggestions, videos with usage suggestions, blog posts and discussions from the community, class activities, additional cases, cartoons, and more. Supplemental materials, including longer cases from all over the globe, can be found on the web.

The introduction to this text explores the argument presented in this preface: managers must be knowl- edgeable participants in making IS decisions. The first few chapters build a basic framework of relation- ships among business strategy, IS strategy, and organizational strategy and explore the links among them. The strategy chapters are followed by ones on work design and business processes that discuss the use of IS. General managers also need some foundation on how IT is managed if they are to successfully discuss their next business needs with IT professionals who can help them. Therefore, the remaining chapters describe the basics of information architecture and infrastructure, IT security, the business of IT, the gov- ernance of the IS organization, IS sourcing, project management, business analytics, and relevant ethical issues.

Given the acceleration of security breaches, readers will find a significantly updated chapter on IS security in this seventh edition of the text. Also, the material on analytics and “big data” has been exten- sively updated to reflect the growing importance of the topic. The introduction has a stronger focus on disruption and digital business models. The chapter on strategic uses provides a new example that will be familiar with students—Facebook’s use of user data for strategic purposes. Also, that chapter extends the timeline of computing eras to a new decade, and has a new ending case about Amazon Go, both of which should provide views of the future that will likely be current for several years. The governance chapter introduces platform governance and discusses digital ecosystems and IT consumerization. Other chapters explore how technologies such as robotic process automation, technology-mediated control, and robots are changing the way employees work and are managed in today’s organizations. The ethics chapter describes the European Union’s GDPR initiative. Many chapters have new end-of-chapter cases. Each of the other chapters has been revised with newer concepts added, discussions of more current topics fleshed out, and

viiPreface

old, outdated topics removed or at least their discussion shortened. Similar to the sixth edition, every chap- ter begins with a navigation “box” to help the reader understand the flow and key topics of the chapter.

No text in the field of MIS is completely current. The process of writing the text coupled with the publication process makes a book somewhat out-of-date prior to delivery to its audience. With that in mind, this text is written to provide the “timeless” elements of using and managing information. With this 20 year anniversary edition of this text, the timelessness of our frameworks and approaches have supported our initial vision that there are key foundational ideas in this area to assist managers. Although this text is complete in and of itself, learning is enhanced by combining the chapters with the most current readings and cases. Faculty are encouraged to read the news items on the faculty Hub before each class in case one might be relevant to the topic of the day. Students are encouraged to search the web for examples related to topics and current events and bring them into the discussions of the issues at hand. The format of each chapter begins with a navigational guide, a short case study, and the basic language for a set of important management issues. These are followed by a set of managerial concerns related to the topic. The chapter concludes with a summary, key terms, a set of discussion questions, and case studies.

Who should read this book? General managers interested in participating in IS decisions will find this a good reference resource for the language and concepts of IS. Managers in the IS field will find the book a good resource for beginning to understand the general manager’s view of how IS affect business decisions. IS students will be able to use the book’s readings and concepts as the beginning in their journey to become informed and successful businesspeople.

The information revolution is here. Where do you fit in?

Keri E. Pearlson, Carol S. Saunders, and Dennis F. Galletta

ix

As we come up on the 20th anniversary of the first edition of this text, we are reminded of the many peo- ple who have helped us with this book and all the previous editions. Books of this nature are written only with the support of many individuals. We would like to personally thank everyone who helped with this text. Although we’ve made every attempt to include everyone who helped make this book a reality, there is always the possibility of unintentionally leaving some out. We apologize in advance if that is the case here.

We have been blessed with the help of our colleagues in this and in previous editions of the book. They helped us by writing cases and reviewing the text. Thank you to Rajiv Kohli, who contributed a case in the governance chapter of this edition. Our thanks continue to go out to many who helped us with this and earlier editions including Jonathan Trower, Espen Andersen, Janis Gogan, Ashok Rho, Yvonne Lederer Antonucci, E. Jose Proenca, Bruce Rollier, Dave Oliver, Celia Romm, Ed Watson, D. Guiter, S. Vaught, Kala Saravanamuthu, Ron Murch, John Greenwod, Tom Rohleder, Sam Lubbe, Thomas Kern, Mark Dekker, Anne Rutkowski, Kathy Hurtt, Kay Nelson, Janice Sipior, Craig Tidwell, and John Butler. The book would not have been started were it not for the initial suggestion of a wonderful editor in 1999 at John Wiley & Sons, Beth Lang Golub. Also, although we cannot thank them by name, we also greatly appreciate the comments of the anonymous reviewers who have made a mark on this and previous editions.

We also appreciate the help of our current editor, Lise Johnson. Special thanks go to Judy Howarth and Vinolia Fernando who helped us with the revision process. We also appreciate the help of all the staff at Wiley who have made this edition a reality.

We would be remiss if we did not also thank Lars Linden for the work he did in building the Pearlson and Saunders Faculty Hub for this book. Our vision included a web-based community for discussing teaching ideas and posting current articles that supplement this text. Lars made that vision into a reality. Thank you, Lars!

We also want to acknowledge and thank pbwiki.com. Without its incredible and free wiki, we would have been relegated to e-mailing drafts of chapters back and forth, or saving countless files in an external drop box without any opportunity to include explanations or status messages. We found that having used the wiki for our previous editions, we were able to get up and running much faster than if we had to start over without the platform.

From Keri: Thank you to my daughter, Hana, a graduate of Tulane University with an emphasis in finance, data science, and analytics, and a now a consultant at EY. Over the years, she has watched and encouraged my professional endeavors in so many ways. But now she’s also a professional in this area and her comments and suggestions for this edition were even more insightful. Writing a book like this happens in the white space of our lives—the time in between everything else going on. This edition was written at a particularly frenetic time, but my family and friends listened to ideas, made suggestions, and celebrated the book’s completion. I know how lucky I am to have this support. I love you guys!

From Carol: I would like to thank Moez Limayem, Dean of the Muma College of Business at the University of South Florida, for graciously supporting conference travel related to my research. Rusty, thank you for being my compass and my release valve. I couldn’t do it without you. Paraphrasing the words of an Alan Jackson song (“Work in Progress”): I may not be what you want me to be, but I’m trying really hard. Just be patient because I’m still a work in progress. I love you, Kristin, Russell, and Janel very much!

From Dennis: Thanks to my terrific family: my wife Carole, my daughters Christy and Lauren, my granddaughter Gracie, and my grandson Matthew and his baby sister Claire, who arrived just before this book was published. Also thanks to Matt and Jacob, two lovable and loving sons-in-law. Finally, thanks to our parents and sisters’ families. We are also blessed with a large number of great, caring neighbors whom we see quite often. I love you all, and you make it all worthwhile!

Acknowledgments

xi

Dr. Keri E. Pearlson is the Executive Director of the Cybersecurity at MIT Sloan (CAMS) research con- sortium and President of KP Partners, an advisory services firm working with business leaders on issues related to the strategic use of information systems (IS) and organizational design. She is an entrepreneur, teacher, researcher, consultant, and thought leader. Dr. Pearlson has held various positions in academia and industry. She has been a member of the faculty at the Graduate School of Business at the University of Texas at Austin where she taught management IS courses to MBAs and executives and at Babson Col- lege where she helped design the popular IS course for the Fast Track MBA program. Dr. Pearlson has held positions at the Harvard Business School, International Institute of Analytics (IIA), CSC, nGenera (formerly the Concours Group), AT&T, and Hughes Aircraft Company. She was named the Leader of the Year by the national Society of Information Management (SIM) in 2014. Dr. Pearlson is coauthor of Zero Time: Providing Instant Customer Value—Every Time, All the Time (John Wiley, 2000). Her work has been published in numerous places including Sloan Management Review, Academy of Management Execu- tive, and Information Resources Management Journal. Many of her case studies have been published by Harvard Business Publishing and are used all over the world. Dr. Pearlson holds a Doctorate in Business Administration (DBA) in Management Information Systems from the Harvard Business School and both a Master’s Degree in Industrial Engineering Management and a Bachelor’s Degree in Applied Mathematics from Stanford University.

Dr. Carol S. Saunders is Professor Emerita at the University of Central Florida, a Schoeller Senior Fel- low at the Friedrich-Alexander University of Erlangen-Nuremberg, Germany, and associated with the University of South Florida. She served as General Conference Chair of the International Conference on Information Systems (ICIS) in 1999, Program Co-Chair of the Americas Conference on Information Systems (AMCIS) in 2015, and the Association for Information Systems (AIS) Vice President of Publica- tions from 2016 to 2019. Dr. Saunders was the Chair of the ICIS Executive Committee in 2000. For three years, she served as Editor-in-Chief of MIS Quarterly. She is currently on the editorial boards of Journal of Strategic Information Systems and Organization Science and serves on the advisory board of Business & Information Systems Engineering, Journal of the AIS, and Pacific Asia Journal of the AIS. Dr. Saunders has been recognized for her lifetime achievements by the AIS with a LEO award and by the Organizational Communication and Information Systems Division of the Academy of Management. She is a Fellow of the AIS. Dr. Saunders’ research interests include the impact of IS on power and communication, overload, virtual teams, time, sourcing, control, big data business models, coopetition, and interorganizational link- ages. Her research is published in a number of journals including MIS Quarterly, Information Systems Research, Journal of the AIS, Journal of MIS, Communications of the ACM, Journal of Strategic Informa- tion Systems, European Journal of Information Systems, Academy of Management Journal, Academy of Management Review, Communications Research, and Organization Science. In 2019, she and A-F Rut- kowski coauthored the book entitled Emotional and Cognitive Overload: The Dark Side of Information Technology.

Dr. Dennis F. Galletta is Ben L. Fryrear Faculty Fellow and Professor of Business Administration at the Katz Graduate School of Business, University of Pittsburgh in Pennsylvania. He is also the Direc- tor of the Katz School’s doctoral program and has taught IS Management graduate courses in Harvard’s summer program each year since 2009. He obtained his doctorate from the University of Minnesota in 1985 and is a Certified Public Accountant. Dr. Galletta served as President of the Association of Informa- tion Systems (AIS) in 2007. Like Dr. Saunders, he is a Fellow of the AIS and has won a LEO lifetime achievement award. He was a member of the AIS Council for five years. He also served in leader- ship roles for the International Conference on Information Systems (ICIS): Program Co-Chair in 2005

About the Authors

xii About the Authors

(Las Vegas) and Conference Co-Chair in 2011 (Shanghai); as Program Co-Chair for the Americas Confer- ence on Information Systems (AMCIS) in 2003 (Tampa, Florida) and Inaugural Conference Chair in 1995 (Pittsburgh). The Pittsburgh conference had several “firsts” for an IS conference, including the first on-line submissions, reviews, conference registration and payment, placement service, and storage of all papers in advance on a website. Dr. Galletta served as ICIS Treasurer from 1994 to 1998 and Chair of the ICIS Executive Committee in 2012. He taught IS courses on the Fall 1999 Semester at Sea voyage (Institute for Shipboard Education) and established the concept of Special Interest Groups in AIS in 2000. In 2014, he won an Emerald Citation of Excellence for a coauthored article that reached the top 50 in citations and ratings from the fields of management, business, and economics. Dr. Galletta’s current research addresses online and mobile usability and behavioral security issues such as phishing, protection motivation, and antecedents of security-related decision making. He has published his research in journals such as Man- agement Science; MIS Quarterly; Information Systems Research; Journal of MIS; European Journal of Information Systems; Journal of the AIS; Communications of the ACM; Accounting, Management, and Information Technologies; Data Base; and Decision Sciences and in proceedings of conferences such as ICIS, AMCIS, and the Hawaii International Conference on Systems Sciences. Dr. Galletta is a senior edi- tor at MIS Quarterly and is an editorial board member at Journal of MIS. In the past, he served as founding Coeditor in Chief for AIS Transactions on Human-Computer Interaction, senior editor at Journal of AIS, associate editor for MIS Quarterly and Information Systems Research. He is currently on the Pre-eminent Scholars Board of Data Base. He won a Developmental Associate Editor Award at the MIS Quarterly in 2006. And during the off-hours, Dr. Galletta’s fervent hobby and obsession is digital photography, often squinting through his eyepiece to make portrait, macro, Milky Way, and lightning photos when he should be writing more papers.

Contents 

xiii

Preface v Acknowledgments ix About the Authors xi

Introduction 1 The Case for Participating in Decisions about Information Systems 3 What If a Manager Doesn’t Participate? 6 Skills Needed to Participate Effectively in Information Technology Decisions 7 Basic Assumptions 8 Economics of Information versus Economics of Things 12 Summary 16 Key Terms 16

1 The Information Systems Strategy Triangle 17 Brief Overview of Business Strategy Frameworks 20 Why Are Strategic Advantage Models Essential to Planning for Information Systems? 26 Brief Overview of Organizational Strategies 26 Brief Overview of Information Systems Strategy 27 Summary 29 Key Terms 30 Discussion Questions 30 Case Study 1-1 Amazon in 2019 31 Case Study 1-2 Lego 32

2 Strategic Use of Information Resources 35 Evolution of Information Resources 36 Information Resources as Strategic Tools 38 How Can Information Resources Be Used Strategically? 40 Sustaining Competitive Advantage 46 Strategic Alliances 51 Co-Creating IT and Business Strategy 53 Summary 54 Key Terms 55 Discussion Questions 55 Case Study 2-1 Amazon Go: How Far Can It Go? 56 Case Study 2-2 Groupon 57

xiv

3 Organizational Strategy and Information Systems 59 Information Systems and Organizational Design 62 Information Systems and Management Control Systems 68 Information Systems and Culture 71 Summary 75 Key Terms 76 Discussion Questions 76 Case Study 3-1 Uber’s Use of Technology-Mediated Control 77 Case Study 3-2 The FBI 78

4 Digital Systems and the Design of Work 80 Work Design Framework 82 How Information Technology Changes the Nature of Work 83 Where Work Is Done and Who Does It: Mobile and Virtual Work Arrangements 91 Gaining Acceptance for IT-Induced Change to Work 99 Summary 101 Key Terms 102 Discussion Questions 102 Case Study 4-1 Automation at Southern Glazer’s Wine and Spirits LLC 104 Case Study 4-2 Trash and Waste Pickup Services, Inc. 105

5 Information Systems and Digital Transformation 106 Silo Perspective versus Business Process Perspective 107 Building Agile and Dynamic Business Processes 112 Digital Business Transformation 115 Workflow and Mapping Processes 115 Types of Enterprise Systems 117 Enterprise System Issues 124 Summary 127 Key Terms 127 Discussion Questions 128 Case Study 5-1 Carestream Health 129 Case Study 5-2 Santa Cruz Bicycles 130

6 Architecture and Infrastructure 132 From Vision to Implementation 133 The Leap from Strategy to Architecture to Infrastructure 134 From Strategy to Architecture to Infrastructure: An Example 141 Virtualization and Cloud Computing 146 Other Managerial Considerations 147 Summary 151 Key Terms 152 Discussion Questions 152 Case Study 6-1 Enterprise Architecture at Chubb Industries 154 Case Study 6-2 The Case of Extreme Scientists 155

Contents 

xvContents 

7 Security 156 NIST Cybersecurity Framework 158 IT Security Governance Framework 159 Cyberattacks and How They Occurred 161 The Impossibility of 100% Security 165 What Should Management Do? 167 How Do We Measure How Secure We Are? 174 Summary 175 Key Terms 176 Discussion Questions 176 Case Study 7-1 The Aircraft Communications Addressing and Reporting System (ACARS) 177 Case Study 7-2 Sony Pictures: The Criminals Won 177

8 The Business of Information Technology 179 Organizing to Respond to Business: A Maturity Model 181 Understanding the IT Organization 182 What a Manager Can Expect from the IT Organization 182 What the IT Organization Does Not Do 184 Chief Information Officer 184 Building a Business Case 186 IT Portfolio Management 189 Valuing IT Investments 190 Monitoring IT Investments 191 Funding IT Resources 196 How Much Does IT Cost? 198 Summary 200 Key Terms 201 Discussion Questions 202 Case Study 8-1 Air France/KLM Airlines 203 Case Study 8-2 Balanced Scorecards at BIOCO 204

9 Governance of the Information Systems Organization 206 IT Governance 207 Centralized versus

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